Texas Vies With Saudi Arabian Oil in California Shipments

Shipping between U.S. ports costs more than international voyages in part because a 94-year-old law called the Jones Act requires domestic cargoes to travel on U.S.-built, -owned and -crewed vessels. Photographer: David Paul Morris/Bloomberg

Jan. 29 (Bloomberg) -- Texas is poised to join Saudi Arabia
as a supplier of oil to California as the mounting glut of crude
on the U.S. Gulf Coast makes the trade profitable.

Kinder Morgan Energy Partners LP, the pipeline operator
that’s buying U.S. oil tankers, said it’s in talks to ship Texas
crude to California through the Panama Canal. The 4,500-mile
voyage would cost about $10 a barrel, broker Poten & Partners
Inc. estimates, making Texas crude competitive with imports
traveling 11,400 miles from Saudi Arabia, the West Coast’s
largest supplier, data compiled by Bloomberg show.

Until now, a U.S. law that makes domestic shipping more
expensive left Californians buying oil from the Middle East
instead. If a shortage of qualifying ships can be overcome,
Texas crude will become affordable on the West Coast as the
highest domestic output in a quarter century creates a surplus
of light oil and drives down prices.

“The West Coast has been short crude over the last couple
of decades with Alaska North Slope and California oil production
down,” Andy Lipow, president of Lipow Oil Associates LLC in
Houston, said by telephone. “Getting more crude from other
areas of North America into the West is going to help refiners,
and if you have a big glut of light, sweet crude on the Gulf
Coast, tankers will load.”

Jones Act

The posted price for light crude from Texas’s Eagle Ford
shale formation has climbed 0.5 percent in the past year to
$93.75 a barrel, according to the marketing division of Plains
All American Pipeline LP. That compares with $98.79 for light
Saudi Arabian crude and $96.29 for the equivalent Iraqi grade,
plus $3.38 for shipping to the U.S. West Coast, according to
data compiled by Bloomberg.

Shipping between U.S. ports costs more than international
voyages in part because a 94-year-old law called the Jones Act
requires domestic cargoes to travel on U.S.-built, -owned and -
crewed vessels. A qualifying tanker commands record rates close
to $100,000 a day, according to MJLF & Associates, a broker.
That’s about 10 times more than a tanker of the same size that
doesn’t meet the requirements, according to data from Clarkson
Plc, the world’s largest shipbroker.

Using a Jones Act tanker may still beat the cost of
transporting oil by train, Court Smith, head of research at
Poten in New York, said Jan. 17. He has since left the company.

Rail costs to Washington State from North Dakota’s Bakken
field run at about $9 a barrel, while Alberta, Canada, to
California costs $13 to $15, Valero Energy Corp., the world’s
largest independent refiner, said in a Nov. 13 presentation. The
company said it would consider the trade if it’s economical.

‘Most Expensive’

Crude-by-rail operations are facing more regulatory
scrutiny after the derailment of a train carrying oil that
killed 47 people in Quebec in July and a Dec. 30 explosion in
North Dakota involving a train carrying Bakken crude.

“Rail is the most expensive, it takes a long time and
obviously you can see clearly what happened over the last few
weeks and few months of accidents,” Fadel Gheit, a New York-based energy analyst for Oppenheimer & Co., said in a Jan. 21
interview on Bloomberg Radio.

Kinder Morgan, the country’s second-largest natural gas
pipeline operator by market value, agreed to buy APT New
Intermediate Holdco LLC and State Class Tankers II LLC from
private-equity firms Blackstone Group LP and Cerberus Capital
Management LP for $962 million in cash. Once final, the deal
will give Kinder Morgan five Jones Act tankers and four more
under construction, each able to carry 330,000 barrels,
according to a Dec. 23 statement.

Kinder Tankers

“Increasingly we’re talking to people, no firm
commitments, who think that they will use Jones Act tankers,
that have to be Jones Act, to take production out of Texas and
move it through the canal and back up to California,” Richard
Kinder, the company’s chairman and chief executive officer, said
on a Jan. 15 conference call. Richard Wheatley, a spokesman,
declined to elaborate.

Kinder Morgan’s net income will rise 31 percent to $1.3
billion this year, according to the average of 11 analyst
estimates compiled by Bloomberg. Its shares will rebound from a
12 percent decline in the past year to gain 9.1 percent to
$86.56 in 12 months, the average of nine estimates shows.

The oceangoing Jones Act fleet of about 85 ships is fully
booked, with no tankers available for one-time cargoes, said Pat
Calahan, a broker and project consultant at MJLF in Stamford,
Connecticut. The ships Kinder Morgan is buying from American
Petroleum Tankers are all booked for several years on long-term
contracts, according to a Dec. 23 company statement. The State
Class ships are scheduled for delivery in 2015 and 2016.

Panama Canal

The vessels are able to cross the Panama Canal, even before
the $5.3 billion expansion that will double the waterway’s
capacity. The project is scheduled to finish next year, with
contractor Sacyr SA pledging to continue construction after
threatening to suspend work unless the canal authority paid for
cost overruns. The parties will continue talks until Feb. 1. The
expanded canal could allow larger tankers to reposition from
Alaska, according to Poten.

The Texas-to-California trade will be more feasible when
there are surplus Jones Act tankers, Calahan said. There are 32
oceangoing tankers and 42 barges, plus 11 dedicated to shuttling
between Alaska and the West Coast, and 16 more under
construction, according to MJLF.

Eagle Ford

“There needs to be more length built into the Jones Act
fleet before the industry takes a look at shipping to the West
Coast,” Glenn Simpson, general manager of crude and
international supply at Phillips 66, said Jan. 22 during a
conference in Houston. Phillips 66 runs three refineries in
California and Washington state that can process a combined
315,000 barrels a day. The company has used Jones Act tankers to
send Eagle Ford oil to its 238,000-barrel-a-day Bayway refinery
in New Jersey.

Kinder Morgan has tried to move Texas oil to California
before. The company shelved plans in May to build a pipeline
that would have carried 277,000 barrels a day from West Texas’s
Permian Basin to California’s refiners by late 2016. Citing lack
of customer interest for the pipeline, Kinder Morgan said at the
time that it would focus on rail projects instead.

There are no pipelines linking the Gulf and California. The
last time a ship carried crude between the Gulf and West Coasts
was in August 2012, Energy Department data through October 2013
show.

U.S. Flags

In the past six months, two U.S.-flagged tankers crossed
the Panama Canal. Chevron Corp.’s California Voyager left
Freeport, Texas, on Jan. 9 and was anchored near San Francisco,
ship-tracking data compiled by Bloomberg show. The S/R American
Progress, a Jones Act tanker owned by Exxon Mobil Corp.’s
SeaRiver Maritime Inc., left Los Angeles on Jan. 5 and is
anchored near Beaumont, Texas, signals show.

Spokesmen for Chevron and SeaRiver declined to comment.

The West Coast imports about 1.25 million barrels a day,
with 24 percent coming from Saudi Arabia, according to October
data compiled by the Energy Information Administration, the
Energy Department’s statistical arm. Ecuador supplies 16
percent, with another 15 percent from Canada and 13 percent from
Iraq, data show.

California’s daily output dropped from as much as 1.1
million barrels in 1986 to 547,000 barrels in October, Energy
Department data show. Alaskan production slumped to 521,000
barrels a day from more than 2 million barrels a day in 1988.
The state’s supplies are poised to rebound as the repeal of a
production tax triggers investments that may boost output by at
least 90,000 barrels a day within four years.

Energy Independence

The West Coast’s reliance on imports contrasts with the
country as a whole, which is meeting the largest share of its
own energy needs since 1986, Energy Department data show.
Nationwide production topped 8 million barrels a day in November
and rose to the highest since 1988 as hydraulic fracturing and
horizontal drilling unlock resources in shale rocks deep
underground.

Because West Coast fuel producers can’t get that oil, their
refining margins of $13.64 a barrel are lower than the $15.21 on
the Gulf Coast, data compiled by Bloomberg show. A gallon of
regular gasoline costs $3.486 on the West Coast and $3.092 on
the Gulf Coast, according to the Energy Department.

Domestic Oil

The Gulf Coast may even have more domestic oil than it can
handle because refineries are configured for heavier grades. The
glut is leading to calls -- from Senator Lisa Murkowski, the top
Republican on the Energy and Natural Resources Committee, to the
American Petroleum Institute, the oil industry’s lobbyist -- to
lift the ban on most crude exports. Moving Texas oil to
California would provide another outlet.

“The West Coast is struggling through a decline in oil
production and having that additional Eagle Ford oil there --
what are the disadvantages at this point?” Taryn Slimm, an oil
and gas analyst who covers U.S. unconventional plays for London-based GlobalData, said by telephone from New York. “It is an
opportunity for the West Coast, and it’s going to relieve the
projected glut that we have on the Gulf.”

Valero, which runs refineries in the San Francisco and Los
Angeles areas, doesn’t ship crude through the Panama Canal to
its California plants, “although we would certainly consider it
if it made economic sense,” Bill Day, a spokesman at the
company’s headquarters in San Antonio, said by e-mail Jan. 16.

Benicia Plan

The company is planning a complex at the 170,000-barrel-a-day Benicia refinery in Northern California that would allow the
plant to unload as much as 70,000 barrels of crude a day from
rail cars. The project is pending city approval.

Tesoro Corp., the largest refiner on the U.S. West Coast,
leases space on Petroterminal de Panama SA’s Trans-Panama
pipeline, Tina Barbee, a spokeswoman at company headquarters in
San Antonio, said by e-mail. The 131-kilometer (81-mile) line
can carry as much as 800,000 barrels of oil a day. She declined
to comment on the Tesoro’s future strategies.

“Someone might say right now, ‘Let’s see if we can make
this work,’” said David Hackett, president of oil consulting
firm Stillwater Associates in Irvine, California. “Straight up,
on a freight basis, Eagle Ford to California works.”